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February 5, 2013

Active ETFs Thriving at 5, Says AdvisorShares’ Hamman

Five years in, products are gaining in the number of new releases and assets under management

Noah Hamman is happy to take up the flag for the active ETF space as a whole.

“In some ways, I feel that from a marketing perspective so much of what we do is addressing the issues the industry faces as a whole,” he says.

When asked about what’s happening with active ETFs now that they’ve hit their five-year mark, Hamman, founder and CEO of AdvisorShares Investments, is succinct; “They’re growing.”

“They’re experiencing triple-digit growth, just liked index-based products did in their early years,” he elaborates, “But the indexed based-products started off with a well-known index behind them, the S&P 500.”

And while investors typically use indexed-based ETFs for trading purposes, Hamman is seeing advisors “making more dollar cost averaging –type of investments for their clients for the longer term, rather than these massive trades, so it results in a smaller ticket size.”

So after five years since the first actively managed ETFs came to market, have they finally “arrived” as a viable product? Hamman doesn’t hesitate, noting the growth has resulted in more products and more assets under management than index-based ETFs had in their first five years.

"Morningstar recently wrote some commentary about how most of active ETF assets are really the result of PIMCO¹s recent entry into the space, which is somewhat true," he concedes. "They also noted that the growth was due the to fact that the active ETF strategy is the same version as the $240 billion mutual fund with the same strategy, which is also true. But the Morningstar analyst doesn't mention the fact that the first index ETF (SPY) was also based on a well-known proven investment strategy."

Elaborating further, he notes that active ETFs have undoubtedly benefited from the education that index ETFs provided but the groups have taken different paths in their initial asset raising. During their early inception, index-based ETFs were targeted by institutions, which are traditionally able to invest more significant amounts of capital.

Active ETFs have mostly been adopted by the retail channel through fee based financial advisors who understand the benefits of active management, but also look for the benefits of the ETF structure which include intraday liquidity, better trading (risk) control (limit orders), transparency, and a more operationally efficient structure that reduces operational expense and can be more tax efficient.

"Many people are saying, 'we'll wait for three years and see what happens from a performance standpoint,' and we're addressing this from a sales standpoint," Hamman concludes. "But they no longer have to do this. The transparency active ETFs offer means no portfolio manager window dressing. In addition, investors can feel more comfortable with the ability to use features such as limit orders to manage their down side risk. We believe active ETFs are off to a great start, but will need to prove themselves over a much longer time frame."